Q: I make and sell earrings on Shopify as a hobby. I’m doing fairly well. Should my next step be to form an LLC?
Thank you to a client for this great question! If you’re a Shopify seller, and you haven’t registered your business with the state, you’re a sole proprietor. Anyone who sells something and hasn’t filed paperwork to form a business entity is automatically a sole proprietor. Many sole proprietors find that after making some money, forming an LLC is a logical (and exciting!) next step. Here, we’ll explain how an LLC can help protect your assets and how to form one when you’re ready.
Can I Run My Shopify Store as a Sole Proprietor?
You absolutely can, and in fact, many Shopify sellers do just that. Sole proprietorships are the most common businesses. They’re easy to start. All you have to do is sell something. The problem with being a sole proprietor is that you are your business. There’s no legal separation between yourself and your business. Business debts belong to you, personally, and vice versa. When you form an LLC, you’re creating a separate business entity with its own assets and its own liability. This means that if (heaven forbid) you face a lawsuit as a Shopify seller, only the assets held by your LLC are at risk.
What is an LLC?
An LLC (limited liability company) is a legal entity that is used to own and operate a business. LLCs provide the same legal and financial protections as corporations, but they are a lot easier to operate and maintain. The main advantage of LLCs is that they offer liability protection in the case of a lawsuit or bankruptcy. In most cases, with an LLC, lawsuits or liens filed against your business won’t affect you personally. This means that you can sleep soundly at night knowing that whatever happens with your business, your assets are safe.
Are there any LLC requirements I should know about?
Almost every state requires LLCs to have a registered agent, which is the person or company that is designated to receive service of process (legal notices) and official mail on behalf of your business. You can be your own registered agent, you can ask a trusted friend or family member, or you can hire a professional registered agent company (we know someone!). An added benefit of a registered agent is that they’ll let you use their address on your public documents, which helps to keep yours private.
Benefits of LLCs for Shopify Store Owners
Limit your personal liability. An LLC is a separate entity from you, its owner. It has its own assets, debts, and liability. This means that if your LLC faces a lawsuit, your personal assets won’t be at risk.
Protect your privacy. An LLC can help you live privately. Listing your email, phone number, or even your home address on a popular site like Shopify could open you and your family up to scammers, spammers, and identify thieves. Listing your LLC’s information can shield your information from the public eye.
Look professional. Having a business with the “LLC” in its name will give your Shopify business a certain level of prestige. Having a registered entity like an LLC shows that you are serious about your business, and that you’re not just some shady online store.
Choose your tax structure. LLCs are considered “disregarded entities” by default and are taxed as pass-through entities. This means that the profits (or losses) from your Shopify store will pass from your business to your personal tax return as income. However, some LLCs can save money on taxes by electing to taxed as a C-corp or S-corp.
How Do I Form and Maintain an LLC?
LLCs are created by filing formation documents, usually called Articles of Organization, with your respective state. Each year you’ll also have to file (and pay for) an annual report. The annual report acts as a yearly check-in with your state. If you form and maintain your own LLC, there is a high likelihood that your personal information will end up on public documents, easily searched by anyone with an internet connection. If you prefer to keep your private information off public filings, you should hire a professional company to start your LLC.